Denel urges state to disburse R700m

Denel applied for a recapitalisation of R2.7bn to assist with its highly geared balance sheet but was only granted R700m in the 2012-13 budget which has not yet been handed over.

The company has, in the past five years, been recapitalised to the tune of R3.5bn by the government.

The R700m was allocated on the condition that the Cabinet approves a funding model, business plan and strategy for the state-owned arms manufacturer. This is expected to be submitted to the Cabinet next month. MPs were concerned that such a late payment would make it difficult for Denel to spend the money this year.

An official of the shareholder, the Department of Public Enterprises, said the department had formulated a funding model which included a five-year rollover of existing government guarantees - which had been approved - and a R100m allocation per annum for three years to help Denel with its interest burden.

The official cautioned however that if the Cabinet turned down the funding model, the department would not be able to disburse the R700m.

State assistance needed

Denel CEO Riaz Saloojee said the company needed state support for its external initiatives and new revenue streams. In a briefing to Parliament's public enterprises committee, he said that Denel had a significant pipeline of orders but that financial support was needed for it to fulfil them.

"We cannot take on huge projects if we don't have a strong balance sheet," he said, citing an "opportunity pipeline" of about R48bn, 33% (R15bn) of which came from the Asia Pacific region, 29% (R14bn) from SA and 23% (R11bn) from the Middle East.

A major thrust into Africa was also planned. Last year, the order pipeline amounted to R44bn. Among the "negative factors" affecting the business he noted was the lack of alignment between its activities and other government initiatives. For instance, the acquisition of aircraft by the state-owned South African Airways needed to be aligned with the growing local aerospace industry.

Saloojee warned that the sustainability of the company was at risk. Internal efficiencies needed to be improved and investment in research and development increased. It was also critical that it diversifies its sources of revenue so that it was not dependent on one client, namely the South African National Defence Force.

This would be difficult to achieve in an industry faced with reduced defence spending by governments.

The company has made notable forward strides, however. Denel had a solid order book, its financial performance had improved and it had a strong base of human capital and conventional technology. It played a key role in skills development, training and black economic empowerment.

Restructuring and turnaround strategies helped Denel make a net profit of R41m in the year to end March on revenue of R3.6bn (R3.3bn). Most of the sales - R2.2bn or 63% - were generated in SA.

However, Saloojee said its high level of debt of R1.9bn compared with equity of only R654m was "very concerning" and has given rise to going concern issues. Denel's solvency of R695m at year-end was also very low for a company of its size.

The company which has received clean audits for several years has been lauded by the Centre for Corporate Governance in SA at the University of Stellenbosch for its sound financial management.

Source: Business Day via I-Net Bridge